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Mortgage Magic or Mortgage Mayhem?

Posted by Larry Doyle on May 5th, 2009 7:02 AM |

Are the largest banks in the land ready to defy the rule of law and self-deal with Uncle Sam’s blessing in the name of providing mortgage relief to homeowners currently strapped by first and second mortgages? The WSJ reports How Big Banks Want To Game The Mortgage Mess. 

Is this another game of chance in which Uncle Sam wants to prime the pump in hopes of luring private capital into the economy? No, anything but. In fact, this is no game at all. Uncle Sam is proposing legislation which would protect mortgage servicers from being sued for not performing their duty to protect the property rights of mortgage investors (including pension funds, mutual funds, insurance companies). What does all this mean?

Investors in mortgage securities backed by first mortgages are entitled and expect protection of their capital by the performance of mortgage servicers handling the monthly payment of mortgage principal and interest. In fact, if the mortgage servicers do not perform the investors will and should sue. 

The investors or holders of second mortgages will only receive a return if and when the first mortgage is current on its payment.

Will Congress pass legislation which would unintentionally incentivize large banks, which also happen to be large mortgage servicers, to game the mortgage modification process for their own benefit but at the expense of investors holding the first mortgages? The WSJ highlights:

Given the current housing crisis, there is wide support for measures to make it easier for homeowners to modify their mortgages. That is understandable. Nobody likes seeing the wave of foreclosures. Plus, mortgage modifications may help stabilize home values.

But in the rush to do something, Congress is showing a regrettable willingness to adopt constitutionally suspect legislation that runs roughshod over the Fifth Amendment of the Constitution, which prohibits the taking of private property without just compensation. Read the rest »


Uncle Sam Guaranteeing Sub-Prime Loans

Posted by Larry Doyle on May 4th, 2009 7:51 PM |

Is Uncle Sam creating another housing fiasco or merely forestalling some pain embedded in the current mess? Hat tip to bonddadddy for bringing my attention to the WSJ editorial today, The Next Housing Bust, which deserves further analysis and promotion.

This WSJ editorial focuses on the Federal Housing Administration (FHA) which insures mortgages via a 100% taxpayer guarantee. In the early part of the decade, the  FHA lost a significant percentage of its market share as borrowers who qualified for these mortgages shifted to “teaser” loans offered by sub-prime mortgage lenders. We all know how that ended.

FHA and VA (Veterans Administration) loans have traditionally been securitized by GNMA (Government National Mortgage Association) and were restricted to a maximum loan size of $362,500. Traditionally, these loans have experienced very low levels of defaults because many of the loans were of much smaller size. Oh, how times are changing! Read the rest »


Chrysler’s Non-TARP Lenders and Uncle Sam: Mano a Mano

Posted by Larry Doyle on May 4th, 2009 1:25 PM |

The Chrysler bankruptcy drama escalates. Bloomberg reports, Chrysler Non-TARP Lenders Object To Auction Plan.   

Uncle Sam would seemingly like to fast track the delivery of Chrysler into Fiat’s hands and run roughshod over the standard rules and regulations of bankruptcy proceedings. Will Judge Henry Gonzalez allow this to happen?

The lenders maintain:

. . . the U.S. government is violating federal law in order to preserve the automaker.

The group, calling itself Chrysler’s non-TARP lenders, in reference to the Troubled Assets Relief Program, seeks to block the proposed sale to an alliance led by Fiat SpA, as well as a request by the U.S. automaker for approval of a $4.5 billion Treasury loan to finance the reorganization. The group said secured lenders who agreed to the Fiat deal, such as JPMorgan Chase & Co., Citigroup Inc. and Goldman Sachs Group Inc., were conflicted because they had also accepted TARP funds.

The process is “tainted” because it was dominated by the government, the lenders argued in papers filed today in U.S. Bankruptcy Court in Manhattan. The group also said the short period of time given to evaluate the sale was improper and the hearing on bid procedures that began today should be delayed. The judge delayed the hearing until 2:30 p.m. tomorrow, ordering the members of the lender group to reveal their identities. Read the rest »


Uncle Sam and State Brethren Are Now Mortgage Brokers

Posted by Larry Doyle on May 4th, 2009 11:56 AM |

Hat tip to KD for highlighting a recent article in the L.A. Times, States Taking Steps To Turn $8,000 Home Purchase Tax Credit Into Cash. I am a proponent of providing tax incentives for purchasing homes.  Have Uncle Sam and his state brethren morphed into mortgage brokers, though, in the process?

My concern with this program is the discipline provided by lenders working with borrowers under this program. Is the government so desperate to support housing that it will forward a down payment in the form of a short term bridge loan to prospective buyers? If the borrower can not repay the bridge loan when receiving the credit next year, the loan becomes a second lien.

This program will support home purchases. However, irresponsible lending on behalf of unscrupulous lenders did the same. As the L.A. Times reports, 

In recent weeks, at least 10 states say they’ve come up with ways to work this monetary magic. They have created innovative bridge-loan programs that advance credit-eligible buyers the cash they need for their closings. Generally the advances take the form of second mortgages — with or without interest charges — that become due and payable whenever buyers receive their credits in the form of refunds from the Internal Revenue Service.

In Missouri, which was the first state to create such a program, buyers can get a no-cost “tax credit advance” of up to 6% of the home price. The advance is actually an interest-free second lien that is repayable no later than June 2010, once the buyers have received their $8,000 tax credit.

If buyers can’t meet that repayment deadline, the advance morphs into a traditional second mortgage with a 10-year payback term and a fixed interest rate one-half a percentage point higher than their first mortgage rate.

The idea that a prospective borrower may need a second mortgage within 12 months of a home purchase strikes me as an immediate red flag. 

As we enter the brave new world of moral hazard and government control of industry, I guess I am going to have to get used to accepting that fiscal discipline and responsible lending aren’t what they used to be.

LD


What Were Ms. Schapiro’s Hedge Fund Investments at FINRA?

Posted by Larry Doyle on May 4th, 2009 8:08 AM |

As Obama looks to send a message to the American public that he will clean up Wall Street, hedge funds are “under the microscope.” Who in Washington will be delegated to lead the charge? None other than SEC head, Mary Schapiro. Bloomberg reports, SEC Chief Schapiro Wants Authority to Make Hedge-Fund Rules.

Hedge funds have become dirty words. When Washington wants to convey excessive Wall Street greed, politicians and regulators now regularly slip “hedge funds” into their statement.

As with any industry, hedge funds run the gamut in terms of business practices and ethics. It is well documented, though, that Washington solicits and receives excessive campaign contributions from the hedge fund community.

I agree that the hedge fund industry deserves greater scrutiny. A trillion dollar industry unregulated is a breeding ground for problems.

Bloomberg reports:

“It’s probably not enough just to register hedge funds” with the SEC, Schapiro said in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” airing this weekend. “It may well be necessary to put in place particular kinds of rules.”

Treasury Secretary Timothy Geithner’s plan to overhaul financial oversight in response to the worst economic crisis since the Great Depression would force hedge funds to register with the SEC, subjecting firms to new disclosure requirements and inspections by agency staff. Schapiro said the SEC’s authority should be broader, so it can impose further restrictions on funds as “situations evolve.”

President Barack Obama yesterday blamed hedge funds that had lent Chrysler LLC money for triggering the automaker’s bankruptcy. Obama said the funds were “speculators” that refused the administration’s buyout offers because they were holding out for an “unjustified taxpayer bailout.”

Schapiro said “it’s certainly possible” that the SEC would consider forcing hedge funds to publicly disclose short- sale positions, imposing restrictions on leverage and restricting what the firms can invest in.

Does anybody have an issue with increased disclosure and oversight? Transparency is critically important in making sure the playing field for all investors is kept fair and level.

Ms. Schapiro does have experience with hedge funds prior to this engagement, though. As I have highlighted, Ms. Schapiro, as head of FINRA, oversaw investments within FINRA’s internal portfolio which included hedge funds, fund of funds, and private equity.

From the 2007 FINRA Annual Report:

FINRA also has investments in hedge funds and funds of hedge funds that it accounts for under the equity method and includes in other investments in the consolidated balance sheets. As of December 31, 2007, the Company had hedge fund investments of $431.2 million.

Ms. Schapiro should be compelled to share with the investing public in which hedge funds FINRA invested.

Will those funds withstand the rigor of newly proposed SEC regulation? At the very least we may learn whether Ms. Schapiro was a good steward of FINRA funds. Beyond that, we may learn a lot more.

If the Obama administration is serious about developing new regulations for Wall Street, let’s make sure the transparency includes Ms. Schapiro’s tenure at FINRA and details of FINRA’s investment portfolio!!

LD


Visualizing Obama’s Budget Cuts

Posted by Larry Doyle on May 3rd, 2009 5:20 PM |

About two weeks ago, President Obama met with his Cabinet and requested they come up with a collective $100 million to cut from federal spending over the next 90 days. Here’s a very clever way of illustrating the impact this cut in federal spending will have on the overall budget. Kudos to the gentleman who made this video:


ARS Investor Makes Public Plea

Posted by Larry Doyle on May 3rd, 2009 2:02 PM |

On the heels of Bloomberg breaking the news of FINRA’s investment in Auction Rate Securities, I have received a number of e-mails from ARS investors thanking me for my pursuit in publicizing that information. One e-mail in particular touched me. This investor purchased ARS from Oppenheimer. His e-mail to attorneys general around the country and major media outlets is powerful. I share his questions; they deserve answers. With the writer’s permission: Read the rest »


NoQuarter Radio’s Sense on Cents with Larry Doyle Tonight at 8PM

Posted by Larry Doyle on May 3rd, 2009 7:38 AM |

UPDATE: The show has concluded, but you can listen to a recording of it in its entirety by clicking the Play button on the audio player below. Once the playback has started, you can fast forward or rewind to any portion of the show by clicking at any point along the play bar. Topics this evening included: the Chrysler bankruptcy situation, Bank Stress Tests, and Auction Rate Securities.

  

******************************

Please join me Sunday evening from 8-9 p.m. ET for NoQuarter Radio’s Sense on Cents with Larry Doyle. The developments in the markets, economy, global finance, Wall Street, and Washington are occurring at breakneck speed. I will try to slow things down a bit and provide a sense of perspective. What did we learn in the markets over the last week and what does that mean for the weeks and months ahead? We will address a wide range of issues, including: the auto industry, government bond market, and economic statistics.

These are truly historic times in the global economy. Let’s “navigate the economic landscape” without the pandering or nonsense found elsewhere! What is on your mind? What would you like to address? Please share your questions and thoughts by calling in to (347) 677-0792, and also join our live chat room, which I’ll start up about 10 minutes before the show begins.

Many thanks to Larry Johnson and the rest of the team at NoQuarterUSA blog for providing such a vibrant vehicle as NoQuarter Radio. I look forward to having you join me Sunday evening as we collectively navigate the economic landscape!!

LD


Is Barack Obama Going Tony Soprano? UPDATE>>

Posted by Larry Doyle on May 2nd, 2009 11:07 AM |

“One of my clients was directly threatened by the White House.”

That’s a quote, folks, from a lawyer representing firms which lent Chrysler money on behalf of their clients, including pension funds, teachers, labor unions, college endowments, et al.

Threatening creditors may be common practice in the underworld. In the world of business and politics, commonly accepted rules of law, business practices and ethics are widely accepted and adjudicated by the courts to prevent abuse. Did the White House just abuse the Constitution in the process of engaging Chrysler’s non-TARP creditors? Tom Lauria, an attorney with White & Case representing a few non-TARP Chrysler creditors, believes the White House did exactly that.

The 10 minute interview (link provided at end of story) that Lauria gave yesterday morning to Detroit radio station WJR’s Frank Beckmann is a MUST LISTEN. (UPDATE: We now have a YouTube audio of the Frank Beckmann-Tom Lauria radio interview. THANK YOU Paul V!!)

Lauria offers, “I represent one less investor today than I represented yesterday. One of my clients was directly threatened by the White House and in essence compelled to withdraw its opposition to the deal under the threat that the full force of the White House press corps would destroy its reputation.”  

Wow!!! Is the press corps so in bed with the White House that it will do its dirty work? Will other creditors fall in line under the pressure of this threat? Is Lauria’s analysis credible?

I believe the answer to all of these questions is yes!!    

In my April 2009 Market Review: Brave New World I wrote:

Companies, consumers, and investors will be forced to adapt to a regular presence of Uncle Sam. He is not a good business partner.

Our economic landscape just entered a whole new realm. I strongly recommend that you listen to the audio recording of Frank Beckmann’s interview with Tom Lauria (special thanks to Daisyjane for the link). 

UPDATE: Here’s the YouTube audio so you don’t have to leave this site. Thank you, again, to Paul.

 

LD

See also: “White House uses strong arm tactics to extort concessions from lenders,” via Memeorandum.com.


California’s $100,000 Club

Posted by Larry Doyle on May 2nd, 2009 9:10 AM |

Hat tip to MC for sharing with us an initiative of the California Foundation for Fiscal Responsibility. The CFFR was founded two years ago to develop transparency in the California pension system. Make no mistake, current and future pension obligations at the state and local level will impact almost every aspect of our lives. The current deficits in these pensions funds and the increasing obligations as our population ages will serve as a chokehold on future generations. This same dynamic is playing out at the federal level as well. However, let’s focus on California.

I am all for longstanding civil servants receiving pension benefits. However, the largesse that has been contracted in certain circumstances is anything but fiscally responsible. I commend the CFFR for working to provide transparency on this topic. Let’s dig deeper. As the Sacramento Bee highlights, Pension Watchdog Puts Database of 5,000 Calpers (California Public Employees Retirement System) Online.

Information is critically important for fiscal discipline. Transparency in the pursuit, collection, and dissemination of that information is a cornerstone of good government. Regrettably, too often our public servants conflict themselves in currying personal favors while obligated to perform their public service. To that end, I commend CFFR for shedding light on this critically important topic:

“We feel it’s time for transparency on this issue,” said CFFR vice-president Marcia Fritz. “In the current economic climate, it’s important that taxpayers know what kind of pensions our public employees are receiving and what the budget implications will be.”

CFFR was founded in 2007 by Keith Richman, a former LA County Republican assemblyman. 

Richman says the foundation’s sole purpose is to highlight  the skyrocketing costs of public employee retirements.

I am not looking to promote personal witch hunts. I am looking to promote fiscal responsibility.  I would hope that every state and local municipality develops an initiative like the CFFR. To that end, please question your local representatives as to how many individuals are collecting six figure pensions. Share with them the fact that in California over 4,800 individuals have six figure pensions. In fact, Bruce Malkenhorst, a municipal government retiree from Vernon, CA is “collecting” a cool half million bucks a year in retirement. An article from Forbes Magazine back in 2007 sheds further light on the municipality of Vernon, California:

Welcome to Paradise
by Evan Hessel 02.26.07

The city fathers of Vernon, Calif. run their tiny town like a family business, with unchecked power, pay and perks.

Four miles south of downtown Los Angeles sits the city of Vernon, a five-square-mile industrial enclave of meatpacking plants, warehouses and paint-mixing factories. There’s not much to see, but smells are plentiful, courtesy of a rendering factory that boils the dead pets of southern California into grease and high-protein animal feed.

Only 92 people live in Vernon. There are no parks, schools, libraries, health clinics or grocery stores. The only four restaurants close by 4 p.m. By sundown the 44,000 workers who commute here have all fled the stench.

Vernon’s leaders like it that way. California’s tiniest city, if you want to call it a city, is one of the nation’s most lasting and efficient political machines, run almost entirely for the benefit of a handful of rarely opposed, extremely well-paid politicians. Vernon should have been subsumed long ago into the surrounding city of L.A, but its independence is a strange and stark example of how a democracy can become a dynasty.

Vernon is run by two families: the Malburgs and the Malkenhorsts, neither of which agreed to be interviewed. The bespectacled Leonis C. Malburg, 77, whose grandfather founded Vernon in 1905, has been mayor for 33 years. Bruce Malkenhorst, 71, was for 32 years the city administrator as well as clerk, finance director, treasurer, redevelopment agency secretary and chief executive of the utility Vernon Light & Power. The city was reportedly paying him $600,000 a year, more than twice what L.A.’s mayor earns, until he resigned all posts unexpectedly and without public announcement in 2005. By most accounts Malkenhorst still pulls the strings. His appointed successor is his 42-year-old son, Bruce Jr.

Theirs is a benign dictatorship. Who would run against them? Outsiders hoping to move into town are denied housing permits and Vernon’s 32 houses and apartments are owned by the city and leased to its employees for as little as $150 per month. In 1980 Malkenhorst Sr. evicted a former cop from his Vernonowned house after he ran against Malkenhorst’s favored candidates. Last year the state Superior Court forced Malkenhorst Jr. to move ahead with an election he had derailed on the grounds that the three challengers had moved in illegally. Once the votes were counted, the incumbents won anyway—in a landslide.

While many state unions do not appreciate the release of information by the CFFR, I believe every state should publicly release it. Watchdog groups should not be forced to request it. To that end, I encourage everybody who reads this post to share the link to CFFR with your local reps and specifically highlight California’s $100,000 Club.

LD


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